Bottoms are Processes, Not Points

The weekend has ended, unfortunately. Welcome back to the grind. This morning reminds us all that it is “global this time”, indeed.

Asia woke me up early with signs of geo-political tail risk that no one wanted to see come to fruition - terrorist related risk into the Olympics. A border patrol station was attacked in Xinjiang, China overnight, and 16 policemen were killed. Local reports, as usual, we’re lacking details, but this set off selling in both Hong Kong and Chinese stock markets. They closed down -1.5% and -2.2%, respectively, leading Asian trading to the downside.

Indonesian inflation was released for July at a 22-year-high of +11.9%, alongside ramping South Korean and Thai inflation reports that surprised me to the upside late last week. Considering that inflation continues to accelerate as Asian economic growth continues to decelerate gave me plenty of reason to sell my “long China” trading position, and stay short Japan. I issued these notes intraday on Friday in our portal.

Japan’s economy is stagflating, and the Nikkei is finally starting to reflect the last few weeks of economic data that have outlined as much. The Nikkei lost another -1.2% overnight, closing at 12,933, and has lost a sharp -5% since the last week of July. I remain short Japan via the EWJ exchange traded fund. On a breakdown through 12,754, I see a test of the March lows of 11,787 as likely.

Pre-market open news flow in the US doesn’t smell any better than Friday’s left over pot of coffee. Over the weekend we saw number 8 on the US bank failure chart come to bear with First Priority Bank going under. Assets were insured by the FDIC, but one has to seriously wonder what Main Street America’s “First Priority” will be if and when this bankruptcy cycle trend continues. Our call has been to get yourself into cash – cash is king – and no one knows that better than Americans.

The ‘Challenger’ jobs report that came out this morning is equally as concerning as the belly up cycle, and in many regards is a function of it. Challenger is reporting that planned job cuts in the United States of America shot up +26% on a month over month basis in July!

After the worst month for commodities in 28 years, the “I” (inflation) factor in our “RIPTE” consumer spending model has clearly toned down, but the “E” (employment) factor continues to flash amber lights. What’s more important to US investors, negative real economic growth or an inflation trade that lost its “positive momentum”? I can tell you what the “Fast Money” community of “buy high, and sell higher” thinks about the answer to that question. Run.

Commodities look like the last leveraged asset “bet” to be imploding. We have basically gone across all 5 asset classes that I care about (Stocks, Bonds, Real Estate, Cash, and Commodities), and crushed them systematically. Commodities were the holdout, and Bernanke can put a quiver into the back of levered long inflation trades if he appropriately steps up and takes a stand at tomorrow’s FOMC meeting. Being in cash remains the best way to participate in the long term healing process that this country will need to fix this mess. Bottoms are processes, not points, and we need to ensure that bottoming processes in the US Dollar, US Housing, and US Equity portfolios is in motion.

As we patiently await Ben Bernanke’s accountability session this week, the world has their Chinese Olympic ‘You Tubes’ on. It is “global this time”, indeed - and everyone is watching.

Have a great week,
KM



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